The Weekly Rap! Friday May 9th, 2014

The Dow last traded at 16,554 right about where it was two weeks ago. The S&P 500 is trading at 1,872. Gold is trading at $1,287 an ounce, while oil futures at $99.98 a barrel. Gas prices, (Regular in El Dorado Hills, Costco, AM/PM), are at $3.95/Gal.

Mortgage Backed Securities or “MBS” yields are interest rates at which banks sell their loans into Fannie Mae and Freddie Mac bond programs. The FNMA 30-year fixed 4.0% coupon, containing 4.25% – 4.625% mortgages, pretty much the benchmark or how rate sheets are priced these days is currently trading at 105.15 about .60 better than where we were two weeks ago. We’ve broken out of the past trading range and rates are trending lower at this point. Basically each percent change in the price of the security translates to the price (or points paid or credited) of the mortgage rate. The higher the number (price), the better the rate.

In economic news this week; The reader’s digest version is the economy continues to limp along but at least moving in a positive direction. It looks like the blame for the slow growth in the economy in the first quarter this year is the Weather. In other words all reports are taken with a grain of salt so to speak.

The service sector and other non-manufacturing companies posted faster-than-expected growth last month, as production and new orders picked up. The Institute for Supply Management said its non-manufacturing index rose to 55.2% in April, the highest reading in six months, from 53.1% in March. Readings over 50% signal expansion — the higher the reading, the faster the expansion.

Slower economic growth caused, as expected, in part by brutal winter weather led to a sharp decline in productivity in the first quarter. The productivity of American businesses fell at a 1.7% annual rate from January through March, the Labor Department reported. The drop in productivity stemmed from companies producing fewer goods and services even as the amount of time their employees worked went up. Poor weather contributed to the disparity as many employees had trouble getting to work or performing their jobs as usual.

Fed Chairwoman Janet Yellen testified before the Joint Economic Committee of Congress on Wednesday and based on her recent “speakings,” we look for direction from the Fed Gods. She stated: “The U.S. economy will end the year in better shape despite the slow start in the first quarter, but recent weakness in the housing market bears watching,” She also said that the weakness in the housing sector has become a concern.“The recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery,” Yellen said. The Fed chairwoman said given the slack in the economy, a high degree of monetary accommodation remains warranted. She once again emphasized a flexible policy path that would respond to changes in the outlook.

On the Real Estate front: Banks are not making it easier for potential homebuyers. A Federal Reserve senior loan officer survey (74 domestic and 23 foreign banks operating in the U.S.) showed that banks are holding loan standards steady for prime mortgages and have raised them for nontraditional and subprime loans over the past three months. Demand for mortgage loans was also weaker. The housing sector has been one of the few troublesome spots in the economy this year, with some analysts pointing to tight credit as a major factor. The Fed’s survey also shows that banks made it easier for commercial and industrial firms to get loans and that these companies have stepped up their borrowing demands.

Home prices according to CoreLogic rose in March, with certain regional markets posting fresh peaks, while the U.S. as a whole saw a sharp slowdown in annual growth. In March, home prices were up 1.4% from the prior month, as Arkansas was the only state where prices fell,. Meanwhile, five states, including North Dakota and Texas, which have seen strong jobs growth, posted fresh peak prices in March.

Looking at longer-term trends, prices are slowing down, with dropping affordability cutting demand. For the year through March, home prices rose 11.1%, a notable slowdown from annual growth of 11.8% in February, which was the fastest pace in eight years. That drop of seven-tenths of a point was the sharpest monthly slowdown for annual growth in three years.Over the year ending in March 2015, CoreLogic expects home-price growth of 6.7%, far below annual rates seen in 2014.

Although sellers don’t love to see prices slow down, a national market in which prices continued to run quickly ahead of income growth for a sustained period would ultimately slash demand. First-time buyers, in particular, have a tough time keeping up with rapidly climbing price growth. This key segment of the market has played a weak role in the recovery, with many stuck living with their parents or preferring to rent.

On the Employment front:Last week it was reported that the U.S. generated 288,000 jobs in April, the best performance since a 360,000 gain in January 2012, and the unemployment rate fell to 6.3%, a strong performance that suggests the economy is accelerating after tepid first-quarter growth. The unemployment rate is the lowest since September 2008.So far in 2014 the economy has gained an average of 214,000 jobs a month, well ahead of the 2013 pace of 194,000.Yet in an odd twist, the size of the labor force fell by whopping 806,000 despite the apparent willingness of companies to hire more workers. That’s the biggest drop in six months and the second largest decline in 32 years. The economy was widely expected to show a faster pace of job creation in April, as warmer temperatures induced firms to add workers they might have hired earlier in the year if not for an extremely harsh winter. The poor weather contributed to a meager 0.1% U.S. growth rate in the first quarter. What’s less clear is if the momentum generated by the switch from winter to spring will continue.

The number of people who applied for unemployment benefits last week fell by 26,000 to 319,000 to mark the lowest level in a month, but the decline likely stemmed from seasonal quirks instead of any major change in hiring trends or layoffs.